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Buyer Supplier Relationships gets Nobel Prize in Oliver Williamson

With 11 out of 13 Nobel Prizes coming to the US the Economics winners  Elinor Ostrom  and Oliver Williamson got sparse press. This despite Elinor Ostrom being the first woman Economist to get the prize.  The name OE Williamson seemed familiar and then it struck me ! This was the legendary Williamson (1975) and (1985) who with his PhD adviser Ronald Coase (1937) practically invented  large parts of the underlying theory of "buyer seller relationships" the central theme of this blog, called transaction cost economics within institutional economics.

In fact, it was during my PhD studies that I came upon the work of Williamson and refer to it frequently in several papers etc.. Essentially the transaction cost economics approach suggests that you stay with the same supplier, to reduce the costs of finding new suppliers and improve the supply chain performance. The subsequent theory development by a variety of scholars in marketing,supply chain,law, organization, strategy and off course economics continue to look at different questions at the "boundary of the firm" aka B2B and Supply Chain.

Here is a rather long press conference video from UC Berkley with Professor Williamson. About halfway down the video (20 minutes) a reporter asks whether the Nobel committee finally recognized him after the global financial crisis where buyer seller relationships had become too cosy and the mortgage mess escalated. This blog has been discussing these inter-organizational issues for the past year and celebrates the timely award to Professor Williamson.

New Business Model for Music Industry needs new ways of capturing value

First record stores were closing in the US as everyone wanted to download music.The record stores were affected as distribution moved online with iTunes selling millions of downloads. The music recording industry was kind of okay with this as they still had a method of capturing value or monetizing their efforts of promoting artists and marketing music. But that was in the US.

It turns out that in China most music ( over 99%) is simply acquired free ,violating copyright laws and disabling the music industry from capturing value. Google in China is offering free music downloads and hoping that AdWords will help capture some tiny piece of value through ad revenues. This ad revenue will be shared by the music industry and Google. In other words, music companies have given up on trying to implement the US business model in China.

Musicians and artists I suppose love all of this as their music gets exposure and anyway they did not make big money in the traditional model where record companies,distributors and retailers made most of the margins and customers had to pay. This industry is sort of different because the musicians work primarily on the premise of "live to work" rather than "work to live" in sectors like banking and auto which seems to be having trouble in recent times.In fact,bankers are leaving banking (they don't love banking ?) given the cut back on bonuses.

The restructuring of the music industry in China  should spread to the US in due course and dis-intermediation of the distribution channels and record companies will create interesting opportunities. You can be sure that musicians and artists will proliferate and new ways of "capturing" value will have to be built.

The G-20 meeting and global supply chains

World leaders are gathering at the G-20 meet in London to find common approaches to deal with the global financial crisis. Let's hope that there is some solid movement forward despite some concerns with more bailouts by France and Germany. A quick ,common and global approach is imperative to bring some measure of stability to global supply chains.For supply chains run on flow of money,goods and services and information. Both money and goods and services are not flowing well and the recession is fueling unrest in the developed world raising risks in parts of supply chains - not used to risks.You load a truck with goods in Western Europe and expect it to reach and don't need to have contingencies in place as in many developing markets.

A positive aspect in all of the current situation is that today there is instant global information flow and media coverage - and this should help resolve the crisis at multiple levels including at the G-20.

Managing risks, actuaries and lessons from AIG- where was the human factor?

Actuarial sciences are primarily mathematical and depend on past data. Since there was no past data the risk of insuring the mortgage-backed securities was underestimated. AIG insured banks for the securities they bought and these debt swaps were an unknown collection of mortgages- some of whom were simply bad loans.

It is not yet clear as to what happened to the human factor in all of this. Maybe the insurance piece was handled from London and there was no real understanding of what was happening on the ground in the US as AIG went on taking on balooning risks. For example, several years ago someone mentioned about a real estate agent he knew who just collected her 6% commission on a home sale being totally uncertain as to how the buyer was going to pay the mortgage. This kind of information was available and discussed accross communities in America as the AIG crisis was building up.

The buyer,seller, real estate agents, real estate closing lawyer, the bank's lawyer in every now defaulting loan closing day would have had a sense of the dubious nature of the loan. Why did not the risk guys at AIG pick it up? Or did they -and nobody listened? 

Banks know that there is risk  and that is why they buy insurance and that is why AIG is paying up and US tax payers have to foot the bill of this now enormous risk.

Going forward, business will have to re-examine their methods of gathering not just past data but new data that is readily available but in this case had not been built into the actuarial models. Raw numbers and technology cannot replace the human factor where human, qualitative real time input must be sought from the ground to get a better sense of the real risks.

Supply Chains and Distribution Channels (B2B) really don't talk to each other

The recent IBM Study points out that visibility and risk are important concerns of supply chain managers. The summary of the report  suggests that companies seem to be more in touch with their suppliers than their customers when it comes to aligning supply with demand. More bluntly the buy side and the sell side have little clue about what's developing on either side of the firm's value chain.

The stark differences in orientation,training and lack of communication between the market end of a company (the B2B end or distribution end) and its back end supply chain function is intriguing. There was a time when these functions were combined together as a "commercial" function which went out of fashion in the late eighties and business school academia,consulting companies and companies themselves pigeon holed sales, marketing and distribution in one bunch and the the supply chain,materials,logistics and procurement as another bunch of functions. If the CEO did'nt actively promote the communication and co-operation between these functions - you landed up with things like the mortgage mess. Those coming up with derivatives never really needed to understand the different types of mortgages that were actually being given out.

ERP systems and particularly Web 2.0 applications will hopefully help better co-ordination in organizations and till they  kick in - some old fashioned "talking" between the marketing and supply functions should help keep the value chain straight.

Banks must start lending for supply chains and B2B to work

Supply Chains and B2B is about the flow of goods and services across links of the value chain. Three components that make up this flow is the actual good or service, information about demand and supply at various points of the value chain and money that moves from B2B in reverse. The money pays for the variable costs (like direct raw material) and other fixed costs like salaries, rent etc.

Normally payments take 30 days or more to materialize and in the meanwhile businesses work on bank credit for working capital. With payment uncertainty from the customer businesses must be able to borrow if the economy is to move. This is not happening and Banks are acting "once bitten twice shy". The US Fed is also reluctant to intervene. 

Unless Banks loosen up and loosen up fast, this downward spiral will continue.

KPO is back in the news

Knowledge Process Outsourcing (KPO) is back in the news with estimates ranging from $10-17 Billion/year volume by 2010. I ran the first ever  MBA elective on "Global Outsourcing of Knowledge Based Services" in Fall 2005 - and a  CAPM seminar in April 2006, with the same title. While well attended, I think KPO  classes and seminars were rather early for 2005.  

During those early years "outsourcing" was a scary word associated only with  layoffs. Globalization and its opportunities was something that was not clearly apparent.

It was nice therefore to read the KPMG report  that explains the difference between "BPO" (Business Process Outsourcing ) and Knowledge Process Outsourcing particularly for the financial sector. The report is well written though I would disagree with the rather provocative subheading ...."outsourcing the core". You really cannot outsource your core competence  but you can certainly re-define what your firm's core competence is when you can get a knowledge task like equity research done overseas at a low cost. But all in all a great report !

e-Sourcing Workshop by Jim Kelly

The e-Sourcing Workshop  by Jim Kelly (of JVKG  )  turned out to be brilliant (check out the photos above).Here was someone who had worked for many years in procurement  and was able to bring out the practicalities of technology adoption in the automation of requisition to procure and pay in a variety of industries.

Later, I had a quick discussion with Jim about how B2B research looks at the e-procurement problem. B2B researchers look at buy tasks as a new task or modified re-buy or straight re-buy with major implications for B2B marketers. Similarly, procurement folks, being key members of buying centers have an urgent need to convert products and services to "straight rebuys" that allows the buying process to really reach out globally for suppliers. And naturally, it is far more easier on e-procurement when requirements are standardized.

A great insight from Jim's talk was, for me, a better understanding of  the nature of the organizational e-procurement process. Consider a three year contract that is negotiated using an e-procurement system. The buyer who works on the system would typically move out of her/his role in three years when time comes to  put out an RFP for the new contract. Institutional knowledge  of the RFP process for the commodity in question is lost and the new buyer has to start all over again.

So what is the big deal with "Sterling Service Contracts" ?

Well for one,  the new Sterling Service Contracts , gets linked to many of the categories that I blog about! And that is a lot of categories...

Some of the things that Sterling Service Contracts will do includes, and I quote from Sterling's press release:

START QUOTE:

• Storefront capabilities that provide customers and partners with a personalized and branded buying experience increasing loyalty.
• Intelligent order orchestration that determines the most efficient and least costly location to fulfill an order.
• A 7000+ member logistics network that reduces the cost of inbound and outbound shipments through optimization, automation, and collaboration with carriers.
• Network-centric WMS that reduces inventory levels at each stocking location by managing inventory across all locations as a single inventory pool.
• Supply Chain Visibility capabilities that balance supply and demand by collecting, summarizing and displaying inbound supply information in a usable, understandable and actionable format.

END QUOTE

Sterling is probably not the only supplier offering this bundle though Forrester Research does think that the product is a step closer to the "perfect order". What's "perfect" about the concept and so fascinating is that it brings alive a lot of organizational theory that was developed for years and years before IT and the Internet made all this a reality.

Michael Richards: from privacy to Internet broadcast

The discussion about on line privacy and data security has been so far restricted to the question of your personal data being hacked and someone stealing your identity. This can result in a host of problems which can be quite severe but can be potentially corrected. A whole bunch of things can be done to protect against this kind of problem. These include shopping on well known websites, watching your credit report, destroying credit offers, going through your credit card bills and so on.

At the other end of the spectrum is Michael Richards who immortalized Kramer in Seinfeld. I am a huge Seinfeld fan but quite frankly I did not get the same buzz I always got watching Kramer make the usual "Kramer"  entry in a re-run last night. This has to do not so much with what Richards actually said in the comedy club but the fact that one could watch the real  video on I think tmz.com. I will not link the video because I think the whole thing is just too painful. All this raises the question of privacy at the other extreme as Steven Levy writes in Newsweek.  He mentions the Bank of America video that I had blogged about.

This whole "net star" kind of thing is indeed the new frontier of the whole privacy and Internet question. You can never assume that an audience you are speaking to is only listening or watching. The whole world might watch ! The PR,advertising and communication world has now an entirely new "public" to handle ! This is peer to peer , depends on buzz and is pretty largely volunteer driven. And it spreads like well -" wildfire" !